What is a business cash flow loan?

Capital is primary for every business to run its daily operations. One of the ways to obtain cash for a business is to apply for cash flow loans. There are several types of business cash flow loans in the market offering different rates, terms and application criteria.

In this blog, we discuss how cash flow loans for business work, and what are the types of small business cashflow loans that MSMEs can avail.

What is a business cash flow loan?

Business cash flow loans refers to debt financing options that are sanctioned on the basis of past and present cash flow of businesses. The timeline for approving a business cash loan is minimal and takes only a few hours. Moreover, it does not require any asset as collateral. Cash flow loans are short term loans and are amortised for a short duration of around four to eight years.

There are 5 main types of cash flow loans:

• Business line of credit
• Instalment loans
• Short-term loans
• Invoice financing
• Merchant cash advances

Example of a cash flow loan

Let us understand the concept of a business cash loan with an example. A pickle manufacturer is seeking ₹10,000 to purchase ingredients for pickle making like vegetables, preservatives, oils and spices, as well as bottles and boxes. With only limited equipment, the small business does not have enough assets to approach a bank for a loan. The business can, therefore, get financial assistance from a lender for a cash flow loan to buy the raw material inventory. As the pickling business seeks its products and generates cash over the next months, it repays the ₹10,000 loan with the due interest.

What are the types of cash flow loans?

As mentioned above, there are 5 types of business cash flow loans. Here is a brief description of each one:

• Business line of credit: It refers to cash flow loans that works like a combination of a credit card and a term loan where the lender authorises an amount of funds with a maximum credit line and business can withdraw money as needed. The advantage of line of credit is the flexibility it offers. Line of Credit loans are both secured and unsecured.
• Instalment loans: Also known as term loans, these cash flow loans have the provision for the borrower to pay the loan back in regular instalments and interest is payable for the entire duration. Such loans can be used for working capital, inventory purchases, and business expansion.
• Short term loans: One of the most popular cash flow loans, these loans offer the borrower a lump sum of money that is to be paid back in frequent instalments in a short period of time. Short term loans use a factor rate to calculate fees for borrowing. It is mostly used for a wide variety of small business operations.
• Invoice financing: This is a type of cash flow loan that allows small businesses to have quick access to cash. Once the loan is approved, the borrower will provide for 85% of outstanding invoices that can be repaid once the customer pays their invoices. The lender then pays the remaining 15% minus the fee. This type of cash flow loans allows business owners to free up unpaid invoices.
• Merchant cash advances: These cash flow loans facilitate small businesses to receive a substantial number of payments through credit card sales. A financing company advances cash in lieu of a percentage of your daily credit and debit card sales, apart from a fee.

When to use a cash flow loan?

A cash flow loan can be used in the following instances:

• Inventory: Cash flow loans are useful to address inventory needs. Small businesses can use these loans to replenish supplies, bulk buying to get a discount or fill product gaps. It also helps businesses in buying raw material to fulfill large, unexpected orders.
• Equipment: Cash flow loans help in replacing or repairing equipment.
• Seasonal slumps: Businesses go through seasonal downturns – when the retail business is not as busy to generate cash flow, but operation expenses don’t stop. A cash flow loan can be used to sustain the business during the slow season.
• Hiring workforce: Businesses also need to increase workforce for business growth. Cash flow loans can help in hiring new employees for your workforce.

What are the cash flow lending sources?

The two main lender options for short-term cash flow loans are alternative and conventional lenders:

• Conventional lenders:

The primary source of term loans and business lines of credit are credit unions and banks. Some of the benefits of applying for a cash flow loan from a conventional lender include greater funding, lower interest rate, and a longer repayment term. However, this option involves stricter requirements from the lenders. Common requirements include applicants with higher incomes, excellent credit scores of 670 and higher and long credit history.

• Alternative lenders

Apart from conventional lenders, businesses can also approach alternative online lenders for a cash flow loan. Businesses with poor credit can secure working capital from alternative lenders as they are less risk averse. Before sanctioning the loan, the financial health of the company is evaluated apart from its credit score.

To sum up: How to secure a business loan for your company?

Access to working capital is essential for every business. One of the options that emerging businesses can explore is a short-term cash flow loan as it doesn’t require any business or personal assets to be given as collateral. Check your requirement and eligibility before you apply for a business cash flow loan. Always ensure that your credit history is maintained at good scores to help you apply for loans.

In case you need financial assistance, you can reach out to Tata nexarc for business loans that offers attractive unsecured loans from leading banks and financial institutions in India to meet your MSME’s financial needs. You do not need to visit multiple banks to find the lowest interest rates, repayment and EMI options. You can also compare the rates of various lenders and find the right option for your emerging business on the Tata nexarc platform.